Multinationals see red in Obama's 2011 budget

WASHINGTON (Reuters) - Locked in by a promise to not raise taxes on middle-class Americans, President Barack Obama is all but certain to again try to increase taxes on companies' foreign income to slow a ballooning deficit in his fiscal 2011 budget plan.

Multinational companies are girding for the proposals, but a slowing economy with 10 percent unemployment, combined with Congressional unease, make action on them unlikely soon.

Obama one year ago unsuccessfully proposed closing a set of tax loopholes and breaks to raise $210 billion over a decade, including a halt to companies deferring taxes on foreign income until related deductions for expenses are recognized.

The administration will likely recycle the plan when Obama releases his 2011 budget in February.

New ideas are also percolating, such as a fee to recoup taxpayer bailouts to banks and a tax on executive compensation. All would need congressional approval to become law.

"We know we're going to get hit. The only question is how badly?" said Catherine Schultz, vice president for tax policy at the National Foreign Trade Council, made up of Fortune 500 companies.

The Obama administration says ending the offshore tax loopholes for big companies would help preserve U.S. jobs, an argument multinationals dispute.

"International tax increases, like those proposed in the fiscal year 2010 budget, will adversely affect the competitiveness of worldwide American companies, and lead to slower economic growth and fewer jobs at home," John Castellani, president of the Business Roundtable, said in a recent letter to Treasury Secretary Timothy Geithner.

The influential group is made up of chief executives of companies such as American Express Co (AXP.N) and Verizon Communications Inc (VZ.N).

Adding to their jitters is the Obama administration's addition of Stephen Shay as the Treasury Department's pointman on international tax issues. Shay, an advocate of ending the practice of letting U.S.-based global companies defer U.S. tax on income earned abroad, joined the department late last year.

In a paper published this month that Shay co-authored before his appointment, he argued that fairness, in addition to economic efficiency, should be taken into account when designing international tax policies.

Although Congress will be tied up with health care and more pressing issues early this year, they will have to tackle the expiration of former President George W. Bush's individual tax cuts at the end of this year, providing a hothouse arena where debate over corporate tax could emerge.

FOREIGN INCOME, CORPORATE RATE

Many believe Obama painted himself into a corner with his 2008 campaign pledge to not raise taxes on families making less than $250,000 a year. Corporate taxes are an easier target, especially ahead of a congressional election in November.

Obama's international tax proposal last year largely built on ideas from a 2007 bill introduced by Representative Charles Rangel, chairman of the House Ways and Means Committee.

Rangel wants to close various loopholes as part of an tax code overhaul. His approach uses the additional tax payments from corporations to slash the top corporate income tax, among the highest in the industrialized world.

Some White House advisers, including Austan Goolsbee, have expressed interest in lowering the corporate tax rate.

"The question is, will those reform proposals in this budget be paired, for example, with a reduction in corporate tax rate?" said Marc Gerson, an attorney at Miller, Chevalier, and former tax counsel for the House Ways and Means Committee.

Even with a corporate tax rate as low as 28 percent, as Rangel has said he could back, won't satisfy many U.S. corporations. Some companies are already getting a lower rate because of a deduction allowed for certain domestic production, Schultz noted.

Cutting corporate taxes may also be a tough sell politically in light of the upcoming Congressional elections that could threaten the Democrats' majorities in Congress and amid a waning economic recovery.

"You don't hear a lot about lowering the corporate rate among members of the public," said Steve Wamhoff, legislative director for Citizens for Tax Justice, a consumer group. "One of the biggest crises we face is just paying for the public goods we need right now."

(Reporting by Kim Dixon; Editing by Julie Vorman & Theodore d'Afflisio)